This week in Barrons – 5.3.2009
The insanity continues to take my breath away – do we actually think the economy is getting better when:
- 631,000 people had to file for first time unemployment last week, and does the ‘average joe’ realize that the previous weeks initial reading was revised even higher than what was reported?
- What about continuing claims (the people already on the unemployment rolls) hitting another all time high?
- What about the unemployment rate? Most people think that it’s around 8% because that’s what you are being told. Actually the U.S. publishes 6 levels of unemployment from U1 - U6. The reported number is U3. For example U6 are the people who are ‘discouraged’ – and because there are no jobs in their area that they can attain. Now prior to 1995, these workers WERE part of the unemployment rolls, but because the numbers became too high – they were eliminated from the reported number. Now if you were to add back those discouraged workers – the rate would be above 18% - and in some states over 20%. In the Great Depression the rate was 25% - so we’re almost there!
- Inflation – the FED tells you 2% - when in reality it’s closer to 12 to 13%
- Housing foreclosures which were "trumpeted" as slowing down, were (in reality) just hiding the 600,000+ properties that weren't even being booked by banks, because they didn't want them showing up on their ledgers. And now that foreclosures have started again – 136,000 new filings just hit – with more to come.
The Government’s Plan is simple:
- flood the system with trillions of printed dollars
- allow the ‘average joe’ to start borrowing again
- feed the taxpayer money to the banking cartel – and let rival banks go belly in order to allow the cartel to buy their good assets for pennies on the dollar and toss their losses onto the taxpayer
- expand ‘detention centers’ and bring more and more military into play in civil manners – to begin to deal with the revolt which will occur when the economy crumbles
Not a single element we see in the true economic numbers equates to a rising market. However, if you believe that the market loves to inflict the maximum amount of pain on the maximum amount of people – then we’re performing correctly and in line with human psychology. For instance - a common adage "the market always looks out 6 months and anticipates what's coming" – appeals to human psychology – but ‘in fact’ just isn’t true. This would tell us that people are looking 6 months out – and investing in equities and their 401k plans – yes? Nope – what in reality is happening is that people are becoming savers – on average saving almost 5% of their incomes. So if people aren’t investing, foreign investors hate us (to quote the Chinese Premier) – who then is driving the market up? Well – it’s not just one person – is many people working behind the scenes – not the least of which are “The President’s Working Group on Financial Markets. The FED, using powers given to it years ago, employs the "working group" which we call the "Plunge Protection Team" (PPT) starts buying futures, and even equities. Once the PPT halts any slide, they then drive the market higher – forcing the shorts to cover – with the ultimate goal of bringing the ‘average Joe’ back into the market – and making their path self-sustaining.
Otherwise – explain earnings reports like this: “Late Thursday, DryShips posted a net loss of $101.8 million, or 93 cents a share, compared to a net profit of $176.3 million, or $4.58 a share, a year earlier. Excluding items, earnings would have been 45 cents a share, much better than the 19 cents analyst predicted. Revenue fell 15% to $196.6 million, slightly below the $197 million analysts were looking for. Voyage revenues fell 58% and the time charter equivalent, a measure of how much a vessel makes on a voyage, tumbled by 58%. Total revenue was boosted by the addition of its drilling business, which it didn't own last year, where revenues were $99 million.” The stock responded by going higher by 11% - but look closely – by ‘Excluding Items’ earnings would have been 45 cents. Heck – by ‘excluding’ my expenses – my income would be higher as well. Meanwhile – they lost 93 cents a share / revenues were down – and even with the $99M from an acquisition they couldn’t make revenue targets. But all the ‘average Joe’ hears is that DryShips beat estimates.
If reality had any say in any of this, what's next would be DOW 5000, but the game is to get the ‘average Joe’ back in – and then crash to DOW 4500 (my guess). Remember several months ago, I said:
- bonds would crash
- interest rates (despite all the FED is doing to keep them down would rise)
- and the TLT, would bust under 100
- WELL it’s done ALL that.
But my point here is that as millions of people sell treasuries, where are they putting their money? In the quest for some form of return, they begin to buy equities and more derivatives. That doesn't mean we won't have smack-downs, pauses, back and fills, and all manner of herky-jerky behavior. What it does mean is that there's still a 70% probability that the market will simply work itself higher and higher over the next several months. Between the stimulus money, the tax refunds, the 13 trillion in pledged money, the TARP’s, TALF’s and PPIP’s aligned with bond money looking for a home, there's even a possibility of a "melt up" where stocks simply don't even take normal pauses.
But please play this carefully. Do NOT go ‘all in’ as there’s still a 30% chance that you’ll be crushed. So, you use smaller allocations, and you take them off the table when they are profitable for you. You don't Buy and Hold – you Buy and Manage. If it's going up, you leave some in play, if it's rolling-over, you dump it and find something else. We currently have 7 individual stocks in play – up on average of 62%: SLW / UYM / GSI / GMXR / WAG / URRE / BUCY / and ARAY.
We are still just below the recent highs of 8251, and as I said weeks ago, that's a fairly significant area in my mind. If the market gets over it and can close a day or two above it, we should see 8500 in short fashion. But I won't be surprised if we need a bit more "work" here underneath that level, before we get over it. In other words, I won't be surprised if we get a sharp smack-down here.
But if there is a ‘smack-down’ I'll be a buyer of the drop, because it's our guess the market has to confound a lot more people before it rolls over for good again and will power back up after any significant drop.
Until next week – Please be safe.
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